We're overpaying to slash the mortgage

Borrowers who have tracker mortgages should take advantage of falling rates and overpay on their loan to cut years, and interest, off their mortgage.

Quick time: The Stone family want to erode their debt faster by paying more

The historic two percentage point cut in interest rates over the past two months means that monthly mortgage repayments have plummeted for some lucky borrowers.

But while the extra cash may come in handy for cash-strapped households, brokers are urging borrowers to maintain their precut payment levels, overpaying on the mortgage to reduce the overall term and interest on their debt.

The savings soon add up. A borrower with a £100,000 25-year repayment mortgage on a tracker deal will be saving about £110 a month now that base rate has fallen by two percentage points.

If, however, they continue to make the same monthly payments - effectively overpaying by £110 each month - they would pay off their mortgage more than six years early and save more than £11,666 in interest.

Tracker mortgages have soared in popularity as interest rates have fallen. One in three mortgages taken out in September was a tracker compared with 17% in September last year.

'Borrowers with existing trackers should use rate cuts to their advantage to pay off their debt quicker,' says Drew Wotherspoon at mortgage broker John Charcol. 'But borrowers with expensive debt elsewhere, such as credit cards, should concentrate on paying this off first.'

Lenders are increasingly offering best rates to those borrowers with more equity in their home, so overpaying is particularly beneficial when you come to remortgage.

Graham Stone, 49, an information systems manager for a car maker, was lucky enough to secure a tracker deal with Woolwich last June. The deal tracks at 0.59 of a percentage point above the base rate for the life of the mortgage so Graham, who lives with wife Gina, 41, a systems manager for the NHS, and children Evie, 6, and Leo, 2, in Winchmore Hill, north London, pays 3.59%.

Graham and Gina were thrilled by the recent rate cuts. But the couple have decided to keep their payments the same and overpay to erode their debt faster. If the base rate stays the same, they will overpay by about £1,500 a year.

'We are keen to clear the debt as quickly as possible,' says Graham. 'Falling rates are an excellent opportunity for us to do that without noticing any change to our monthly outgoings.'

Borrowers may need to ask their lenders to keep higher repayments but this should be easy to arrange.

New tracker deals for homebuyers and remortgage borrowers are not as attractive as the deal Graham and Gina secured. But with experts predicting interest rates could fall as low as one per cent as the economy falters, a tracker still looks like an attractive option.

'If you are on a tight budget or you are worried about mortgage repayments you should fix your rate,' says Richard Morea, broker at London & Country Mortgages in Bath, Somerset. 'But for those able to take more of a gamble and who could cope if rates rise again, trackers offer excellent value.'

HSBC is offering a lifetime tracker at 0.99 of a percentage point above base rate. This is available only to borrowers with a 40% deposit.

Abbey has a two-year tracker at 1.89 points above base rate with a £499 fee - also for borrowers with a 40% deposit. Woolwich has a lifetime tracker at 2.09 points above base. Borrowers need a 40% deposit and there is a £995 fee.

Borrowers should be aware some lenders apply a cut-off on how low tracker rates can fall - known as a 'collar'. For example, with Nationwide Building Society once the base rate falls to 2.75% it will not pass on any more cuts to tracker borrowers.

Abbey and Alliance & Leicester will let the base rate fall to 0.01% before they stop passing on rate cuts while First Direct and C&G have no collar.

HSBC, Halifax and Woolwich have no stated collar but say they reserve the right to change margins on existing tracker deals.